CPP Basic 3 — Questions and Answers
Question 1: An employee's W-4 shows single filing status and no additional withholding. Under the 2020+ W-4, what determines federal income tax withholding?
- Number of allowances claimed
- Filing status and income from Steps 2–4 only (Correct answer)
- Standard deduction divided by pay periods
- Flat percentage selected by the employee
Correct answer: Filing status and income from Steps 2–4 only
The 2020 revised W-4 eliminated allowances; withholding is based on filing status plus any adjustments from Steps 2, 3, and 4.
Question 2: Which payroll register entry records the employer's share of FICA taxes?
- Employee deduction
- Gross-to-net calculation
- Employer payroll tax expense (Correct answer)
- Net pay disbursement
Correct answer: Employer payroll tax expense
The employer's matching FICA contributions are recorded as employer payroll tax expense, separate from employee withholding deductions.
Question 3: What is the FUTA tax rate after the standard 5.4% credit for states with no credit reduction?
- 6.0%
- 5.4%
- 0.6% (Correct answer)
- 3.0%
Correct answer: 0.6%
The gross FUTA rate is 6.0%; employers in states with no credit reduction receive a 5.4% credit, leaving a net rate of 0.6%.
Question 4: Which document authorizes a payroll professional to release an employee's paycheck to a third party?
- Direct deposit authorization form
- Written power of attorney signed by the employee (Correct answer)
- Manager's verbal approval
- HR termination form
Correct answer: Written power of attorney signed by the employee
A written power of attorney legally authorizes a third party to receive wages on behalf of the employee.
Question 5: Under IRS rules, how long must payroll records generally be retained?
- 1 year
- 3 years
- At least 4 years (Correct answer)
- 7 years
Correct answer: At least 4 years
The IRS requires employment tax records to be kept for at least 4 years after the due date of the tax or the date it was paid, whichever is later.
Question 6: What term describes wages that are subject to Social Security tax?
- Taxable wages
- OASDI wages (Correct answer)
- FUTA wages
- Supplemental wages
Correct answer: OASDI wages
OASDI (Old-Age, Survivors, and Disability Insurance) wages are earnings subject to the Social Security portion of FICA tax.
Question 7: An employer pays a $500 signing bonus to a new employee. How should this be treated for payroll tax purposes?
- Excluded from FICA because it is not regular wages
- Reported on a 1099-NEC as miscellaneous income
- Included in gross wages and subject to all applicable payroll taxes (Correct answer)
- Deferred until the employee completes 90 days of employment
Correct answer: Included in gross wages and subject to all applicable payroll taxes
Signing bonuses are supplemental wages included in gross pay and subject to federal income tax withholding, FICA, and FUTA.
CPP Basic 3
An employee's W-4 shows single filing status and no additional withholding.
Under the 2020+ W-4, what determines federal income tax withholding?